Grupo Traxión, S.A.B. de C.V.

Greetings. Welcome to Traxion fourth quarter 2020 earnings call results. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. Please note this conference is being recorded. I will now turn the conference over to your host, Abhi Lischain, our executive president and co-founder. Thank you. You may begin.

Thank you. Welcome again to Tracción Earnings Call. I hope you and your families are safe and healthy. As usual, I will comment on some relevant aspects of the quarter before handing over to Rodolfo Wolf Antonio, who will discuss operating and financial figures in detail. For the third year in a row, Tracción posted impressive results. Despite the pandemic, the company achieved record high financial and operating figures. We faced the contingency with a defensive position and the results were positive. I am very proud to share with you that in October, TRACCION joined the United Nations Global Compact. It made a very significant step towards ESG and the implementation of the best practices in terms of sustainability. It was the most challenging year, but also the best in our history. tested our business model resiliency, the execution capabilities of our management team, and the flexibility of our commercial Moscow. As you know, Tracción launched an asset-light division in 2020, focused to capture the growth of logistic services. The company was very well positioned to capture the growth that came with the contingency, as people were forced to use e-commerce. We basically tripled our exposure to logistic channels related to it. This boost in electronic sales encouraged a faster development of the logistic infrastructure needed to support an appropriate penetration of e-commerce and Traccion took advantage of that. Moreover, through Traccion Logistics, our technology-driven platform, we became the supply chain manager of several clients, and our focus is to continue to be for many more of them in the near future. Moving on, Tracción surpassed its guidance figures once again over a very complex macro environment. The company reached 14.3 billion pesos in revenues, 3 billion pesos in EBITDA, and 661 million pesos of net income. What I think is more relevant here is to compare these figures to those of 2017 when we became public. We basically doubled our revenues in three years, with an impressive growth in EBITDA of 140%, a 330 basis point expansion in margin, and a 97 growth in net income. Additionally, operating cash flow grew 17.5 times. These are truly remarkable figures, especially given current conditions. Shifting gears, our cargo operations maintain a healthy level. We have to shift our fleet continuously among sectors and geographies to satisfy demand. Logistics recorded significant growth as well, mainly driven by e-commerce activity that boosted our last mile business, which registered a growth of almost 300% in the fourth quarter. and by an expansion of 25%, which is more than 105,000 square meters of 3PL warehouse space, which resulted from increased demand. In these business lines, we are preparing an investment plan to reinforce our operating infrastructure, especially in the last mile segment, which is the one showing more dynamic growth. In terms of personal transportation, as you know, we started facing increased demand mainly due to social distancing measures. And we have to shift the fleet that is normally dedicated to schools to serve these clients. Such demand surpassed this capability and we needed to outsource approximately 500 buses from other players. As of today, we continue to face over demand. We are constantly in touch with our clients to know their expectations and improve the profitability of such fleet outsourcing. Finally, in terms of guidance and due to the global macro landscape, we are planning a growth of approximately 10% in both revenues and EBITDA and maintain our margins. We expect to deploy approximately 2 billion pesos of CAPEX. mainly for fleet renovations, growth initiatives with both existing and new clients in the personal transportation segment that got delayed by the contingency, and by investments in technology to reinforce the asset-light division. With this, I conclude my remarks, and I will hand over to Rodolfo. Please, Rodolfo, go ahead.

Thank you, Avi. Good morning, everyone. Thanks for your attendance. I will now discuss the most important operating and commercial highlights of the quarter. In the personal transportation segment, we started operating 250 new buses during the last three months as a result of an active pipeline and some initiatives that were reactivated after being deferred at the beginning of the contingency. Moreover, our level of service is reported to be above 97% in this business. mainly due to technologies implemented during the pandemic for a better control management. In the cargo segment, we started freight operations of natural gas. It was the kickoff of the first stage of a multi-annual contract. We also continued to grow in the refrigerated service as well. Furthermore, we executed a joint venture with a multimodal logistic operator. to strengthen our exposure in the intermodal service. In the logistic arena, as you know, we basically triple our exposure to e-commerce. Traccion, with his last mile subsidiary, Redpack, which was acquired in 2018, was very well positioned to seize opportunities and expansions, especially from e-commerce. In this segment, we expanded the fleet by 10% in this quarter to face increased demand. And we continue adding new clients, both domestic and foreign, to our base. It is important to highlight that we consider that approximately 70% of revenues of Red Pack are directly linked to e-commerce. We expanded our 3PL logistics space by more than 85,000 square meters to reach 535,000 in total. as a result of an aggressive commercial strategy that resulted in an increase of both existing and new clients. We further enhance handling volumes in some of our operations in optimized spaces, which improves our margins. Shifting gears, Traction Logistics, our logistic platform, ended his first year of operation with better than expected results. which proves our value creation capabilities throughout this technology-driven logistics solution platform. Our asset-light approach toward logistics services is starting to pay off, and we expect to continue to see positive outcomes from this business over the long run. As you all know, it wasn't a typical year. However, we achieved our goals with a different mix and throughout enormous effort of our team. with all our business lines showing improvements both operationally and financially. Having said this, I will now hand it over to Wolf. Please, Wolf, go ahead.

Thanks, Rodolfo. Hello, everyone. I just want to walk you through some financial highlights. Tracción surpassed its guidance for the year and did so through a different revenue mix than originally planned, and most important, with 26% less capex than expected. This happened mainly due to some investment projects we had with both existing and new clients that were put on standby given the pandemic. During the contingency, we implemented an aggressive expense control plan that resulted in economies of scale and efficiency in general expenses of 150 basis points as a percentage of revenues compared to 2019. In terms of cost, there are some changes in the cost structure compared to 2019. that were driven by the asset-light business line, which require outsourcing of fleet and services. In that regard, fuel costs decreased due to two main reasons. The first is that Tracción handled logistics-related cargo services to third parties, which brought down these costs. Moreover, there was a general decrease in process. And the second reason is a general price decrease compared to 2019. Furthermore, our facilities, services, and supplies costs increased significantly for both the quarter and the year. This phenomenon started in the second quarter of 2020 and continued over the third and fourth quarters, and is explained by the increase of third-party outsourcing of logistics services in a series of business lines, cargo, last mile, customs, less than truckload, and 3PL. Moreover, as you know, we experienced over-demand in our personal transportation segment, which we converted with a portion of rented units from third parties with such rentals recorded in this line. Moving on to operating cash flow, there are some variations both in the quarter and in the year, mainly on the working capital cycles that affected the operation cash flows. The main variations in the year are explained by two things. An increase in accounts receivable driven by growth in the client base of logistics services and new clients starting operations in the personal and student transportation. And second, in an increase in refundable taxes that also move the cash flow figure. In terms of debt, Tracción decreased its leverage ratio to reach 1.6 times net debt to EBITDA, compared to 2.05 times at the end of 2019. Total debt increased only 773 million pesos, while net debt decreased 410 million pesos, mainly driven by an enhanced cash position. Another important aspect to highlight in terms of debt is that with the bond we issued in September, the company managed to improve significantly our debt maturity profile, including several other refinancing of the other facilities. Having said that, I'll hand over to Toño, who will discuss financial details in much more detail. Please, Toño.

Thank you, Wolf. Hello, everyone. Welcome. As you already saw, Tracción continued with a very dynamic trend over the fourth quarter and ended 2020 with a very positive outcome. I will now walk you through some financial details before opening the floor to Q&A. In 2020, Tracción delivered a very strong growth in consolidated revenues of 17.6% to reach 14.3 billion pesos in the year, which is by far the highest revenue figure in the history of the company. This growth was driven by a considerable expansion in the activity of logistics channels, especially those related to e-commerce, and by increased demand in the personal transportation service, which posted a 19.4% growth in kilometer volume, mainly due to the over demand that started with the pandemic. Moving on, operating income increased 38.4%, which is more than double the growth of revenues. and was mainly driven by strict cost and expense controls implemented back when the contingency started. Moreover, in terms of costs, Wolf already discussed the most relevant adjustments that changed the cost structure of the company as logistics services gained more relevance in our P&L. But it is worth mentioning that labor costs increased mainly due to growth in logistics business lines and to the expansions in the personal transportation segment that required more headcount. Then there is fleet maintenance, which usually is consistent, but there were some preventive maintenance costs that were delayed by the contingency and needed to be carried out during the quarter. We also had to provide maintenance to a portion of the third-party units we have been outsourcing. However, on a year-on-year basis, fleet maintenance recorded a marginal increase of just 1.6%. Moving on to margin, on a yearly basis, Tracción was able to preserve its margin which is good news given the complexity of 2020. Cargo and logistics EBITDA posted an increase of 19.3%, but a compression of 50 basis points in margin. This is due to the relevance of logistics services in the P&L that carry lower margins by nature than those of regular cargo. This is consistent with what we experienced over 2020. Finally, the personal and student transportation segment recorded an increase of 22.8% in EBITDA, and an expansion of 260 basis points in margin compared to 2019. This is indeed a very impressive figure. Moving on to comprehensive financial result, Traction recorded lower interest expense in the year, mainly driven by the bond issuance and the refinancing of some facilities that resulted in a better financing cost. But in the quarter, there is an impact on foreign exchange and an effect on the interest rate derivatives. Overall, there is no significant change in this item for 2020. Shifting gears, net income reached 189 million pesos in the quarter and 661 million pesos in the year, which represents very impressive growths and are very healthy figures considering the complex macro situation we are currently undergoing. Well, thanks for your attention. With this, I wrap up my remarks. I will now open the floor to Q&A.

At this time, we will be conducting a question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment, please, while we poll for questions. Our first question is from Alejandro Demichels of Now Securities. Please state your question.

Yes. Good morning, gentlemen. Thank you, Ronit, for taking my question. The first question is could you please provide some split on that 2 billion pesos capex number, specifically how much goes into growth, how much goes into renewal of the fleet, and so on?

Hi, Alejandro. How are you? This is Wolf. To explain a little bit more from the CAPEX, we are projecting 40% of that number of the 2 billion pesos for renewal of the fleet. Part of that comes from the 2020 catch-up that we didn't make, the reposition or the replacement that we need in that previous year. And the other 60%, it's basically from the growth that we are expecting in both segments, cargo and also personnel. And also for this year, we are expecting an important number also for the technology side, so we can also provide more volume also to e-commerce and the 3PL warehousing.

Okay, that's clear. So if 60% of the capex goes into growth, then is that 10% revenue growth a conservative estimate that you have there?

Sorry, can you repeat the question, Alejandro?

Yes, sorry, the question is, if 60% of the capex goes into growth, isn't that a conservative number that you put for 10% revenue growth?

we're we're trying to just to know also the seasonality and we are planning to deploy this capital throughout the year so we're not investing all in the in the first quarter so that that's maybe why you think that numbers for the 2021

Okay, that's clear. And just one quick question to follow up. Have you seen any disruption recently from the Texas situation in terms of cross-border or cargoes in some of your clients?

Yeah. Hello. How are you, Alejandro? This is Rodolfo. We experienced a few days of interruption to do the cross-border business, but It's back to normal right now. It was only due to weather. You know, the few days it was a little worse in that part of Texas and Mexico.

Okay. That's very helpful. Thank you. Thank you.

Our next question is from Martin Lara of Miranda Global Research. Please state your question.

Good morning. Congratulations for the very strong results. I have two questions. The first one is, how big do you think the e-commerce business can become in, let's say, three to five years? And the second one is, what can you expect in the last mile and three PL storage businesses just for this year?

OK. Talking about e-commerce, we expect very important growth in Mexico. Because we have some figures that says that e-commerce now is around 6% of the total commerce of the country, comparing to, for example, the United States, that it's about 20%. So Mexico has a lot to develop in that business. So we believe that the trend of growth for e-commerce in Mexico is going to continue for the next years.

Okay, and for this year, yeah, sorry.

No, go ahead. If you can repeat, please, the second question.

In the Love My Land 3PL businesses, what can we expect this year? Do you think the significant growth that you achieved in the fourth quarter is sustainable?

Hello, how are you? This is Robolfo. Yes, the growth, we're working really hard to improve, to put that part of the business grow really fast in the next month. So I think the growth we have been experiencing in the last quarter can be expected in 2021, too, also.

Okay. Thank you very much.

Our next question is from Edson Maria of Summa Capital. Please state your question.

Hi, good morning. First of all, I want to say as an investor, we are amazed from your results and congrats on those amazing numbers despite the pandemic. So I have two questions. The first one is related to this initiative of our designations and could be even more called about. And it is going to be there's the new beginning of ESG. I don't want to say trend, but maybe it is a trend. And if you're going to be presenting the results more likely to ESG metrics as the market's expected. I think that would be the first one. The second one is related to what about your thoughts about this unshoring, reshoring, and your expectations for 2021, considering what the environment in Mexico it is.

Sorry, Edson. Can you please repeat the first question?

Yes, of course. The first question is related to This initiative about the United Nations, about this compact of what I mean, a little bit compact, is we understood that you are considering more ESG initiatives, considering that you are going to be involved with this United Nations initiative. So the question is, are you... planning to implement more ESG metrics in the future and are you going to present it for the next quarters?

Yes, actually we are in 2020 we implemented fully our ESG strategy. We had all the questionnaires answered by SAM and CDP. We also had our first environmental and climate change evaluation, and we created the Tracción Foundation. We also are going to publish in April our second integrated report, which is going to be in line with the GRI standards, with the TCFD framework, and we're going to report SASBIC. We're going to start reporting SASBIC, which is the Sustainability Accounting Standard Board, And then for 2021, we're going to implement the full system of sustainability management, interaction with KPIs and balance scorecards and specific targets. This is very important because all these targets are right now on the process of approval. So we are expecting to implement this management, this ESG management system shortly. We're going to also do all the development of the green vision for Tracción over the long term. And we have a lot of initiatives that are going to be channeled more efficiently through the Tracción Foundation. All those resources, time and people and money and all those resources are going to be channeled more efficiently through the foundation. I don't know if I answered your question correctly.

No, absolutely. And thank you for that caller. And on regards on the second question, could you give us more details about what your expectations are on showing and how it can impact your businesses? I mean, probably a little bit more context. It's because this announcement of Amazon's saying that they're expecting to establish a new distribution center in, I think it's in Morelos or something related like that. So why are you expecting? Because I mean, at the end, you are part of the supply chain.

Yes, actually, we are part of the supply chain. We work with Amazon. And we expect not only to work with Tier 1, which are the Amazons and the Mercado Libres of the world, but also with Tier 2 and Tier 3 companies. There's an enormous penetration potential for these e-commerce companies that not only last mile, but in other logistic services that surround the e-commerce segment.

Perfect. Thank you so much. Thank you for the call. And again, congrats for the amazing results in the fight of the pandemic.

Thank you, Edson.

As a reminder, if you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment, please, while we poll for additional questions. Our next question is from Steven Trent of Citi. Please state your question.

Good morning, everyone, and thanks very much for taking my question. Just one or two for me. First off, I was wondering if you could give us a little color on what you're seeing in the competitive environment. You know, your e-commerce growth is certainly intriguing. Just curious, at least at this point, if the majority of that competition is still highly fragmented.

Yes. I mean, talking about e-commerce, you have the big players like the DHL, FedEx, et cetera. But also, there is a very big number. We can talk about hundreds of companies that are really small companies and family-owned businesses, but also in the last mile business. So we see a huge opportunity to gain market on a market that is growing for the e-commerce. And I've been talking about the rest of the competition in transportation and mobility in Mexico. It's very fragmented. Traction is the largest player in the country, and it's the only institutional player in Mexico.

Okay, super. And with respect to some of the larger participants in the broad space, you think it would make sense at some point down the line to you know assuming that the antitrust issues are not in are not a problem to do some kind of joint venture per se with you know one or more global players yes I mean a good make sense and in the future mainly for the international business so we're used to work with with other

companies in the sector and make alliances and have more competitive advantage.

Okay, very helpful. Yeah. Very helpful. Appreciate the time, guys. Thanks to you, Steven.

As a reminder, if you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate that your line is in the question queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment, please, while we poll for additional questions. There appears to be no more questions at this time. We have reached the end of the question and answer session, and I will now turn the call over to Abhi Liz Chain for closing remarks.

Thank you. Tartunga through its resilient business model. We have exceeded our guidance for 2020. We are the leader of the industry with financial strength and profitable growth. We are facing a great business opportunity with e-commerce and of those logistics service supported by technology. We'll see you on traction day on March 10 at 11 a.m. Mexico time. Then we'll talk about the strategy of the company in more detail. The registration and connection links will be available shortly. If you need assistance, please contact Tonio. See you there. Have an excellent weekend.

This concludes today's conference, and you may disconnect your lines at this time. Thank you for your participation.